Distribution at Tipping Point: What Procurement Should Know

February 28, 2017 at 7:57 AM

More optimistic than they have been in a long time, distributors now have to make decisions that could affect their competitiveness, or as procurement sees it, their relationships with customers, for years to come. MRO stands for Maintenance, Repair, Operations, the goods and services that keep a facility up and running.

That’s the reading from results of a recent MDM-Baird Distribution survey that presents a snapshot of business conditions the suppliers were experiencing in the fourth quarter of 2016 and an outlook for 2017. MDM presented survey results and analysis in a webinar broadcast earlier this year. For its survey, MDM queries more than 500 distributors and manufacturers that in total report annual revenue of more than $100 billion.

“The year finished strong and there is more optimism for 2017 than at any time in the past five years or more,” said Tom Gale, Publisher at Modern Distribution Management (MDM), of the survey results during the webinar. “Still, the crystal ball is not clear. There is more turbulence than ever across all channels of distribution.”

David Manthey, Senior Research Analyst, Industrial Distribution Services, at Baird, set the stage with a look at the U.S. economy. The rising stock market, he said, “hopefully foreshadows good things.”

For now, though, “the world is awash in too much of nearly everything.” Yet Manthey pointed out that recently there’s been some change in some markets “reflecting optimism following the election….Crude has rallied from the $30 a barrel range to the low 50s today. Copper which peaked in 2011 recently broke a six-year downward trend. The U.S. dollar which had been strengthening for the better part of the decade has started to weaken. Although the fundamentals have not changed on a dime, the narrative has changed to a pro-growth inflationary environment with lower regulation and infrastructure investment.”

As he sees it, sectors of the economy that industrial distributors serve could benefit from such an environment: Now manufacturing is “somewhat anemic…nonresidential construction is in better shape…the residential construction and repair market continues to recover.”

Looking at distributor revenues for the fourth quarter, growth rates ticked down ever so slightly in the aggregate, Manthey said. “It is fair to call 2016 flat overall, but there are key end-market differences starting to emerge.” Pricing is fairly flat and inventory levels remain stable.

Asked to share expectations for the year ahead, respondents to the MDM-Baird Distribution survey are looking forward to a growth rate of 3.6% in 2017. Manthey suggested webinar attendees take this information with a grain of salt. “In recent years, the outlook tended to be too optimistic," he said. "But let’s see if the Trump effect can break the streak.”

Digging into survey data on the industrial supply sector, Manthey found that for the fourth quarter “aggregate growth turned slightly positive for the first time in more than a year.” Overall, manufacturers and distributors in the group are forecasting 3% growth in 2017. The survey looks at distributors of products and services in four categories: Industrial supplies, industrial gases, building products and facilities maintenance, and electrical and datacomm.

Given that steel prices are beginning to tick up, some distributors, especially those in metalworking and fastener subsectors of the industrial supplies category—may be sending customers letters announcing related price increases. “We are seeing this more,” Manthey said. “But will the increases stick in a weak demand environment unless things change for the better?”

As for the electrical and datacomm sector, “growth took a noticeable step down in the fourth quarter,” Manthey said, suggesting the downtick could be a data anomaly and not a change in the long-term trend. Suppliers are forecasting 3% growth which is similar to earlier outlooks, he added. Meanwhile, pricing remains “fairly stable.”

2017 Distribution Industry Trends

In addition to surveys, the MDM team studies the market to learn how successful distributors differentiate themselves from their competitors and are gaining market share. Publisher Gale said the team sees a growing gap between companies adapting to trends and those that are not, suggesting the industry is coming to a tipping point “where the gap becomes a cliff.” He added that distributors and their manufacturer suppliers in all industry sectors— and serving a variety of customers—are experiencing the trends at different rates.

Distribution industry trends identified by the MDM team that procurement leaders might want to keep an eye on in 2017 include:

Convergence. “One key driver for everything is the customer, and the markets are converging on one segment as we approach 2017—those companies with 10 to 10,000 employees,” Gale said. He also pointed out that the way all customers buy is changing, with distributors adopting multi-channel selling strategies to keep pace. Some distributors like Grainger are streamlining the role of the branch. All are focused on what online retail giant Amazon is doing.

Technology. Permeating every aspect of distribution, technology remains a challenge for many in the industry, said Jenel Stelton-Holtmeier, Editor at MDM. Those companies that have been investing in technology for years will continue to do so especially in the areas of e-commerce, customer relationship management (CRM) and mobile. At the same time, distributors will be focused on getting the most from their ROI (Return on Investment) in technology.

Human capital. In 2017, talent will factor significantly in wholesale distribution’s tipping point, said Eric Smith, Associate Editor at MDM. In fact, HR-related issues is the number-one concern for distributors in MDM’s surveys, with talent retention a big challenge. “Talent is a key differentiator, Smith said. “If you are not getting good people and keeping them, you will fall behind.” Look for distributors to elevate HR to a more strategic role, explore new ways to attract and retain talent by partnering with college industrial distribution programs, and consider needs of the Millennial generation.

Susan Avery

Susan Avery is Editor-in-Chief at My Purchasing Center. She writes articles, blogs and white papers and manages and creates other content for the online procurement and supply management publication. She produces and moderates roundtable discussions, podcasts, webcasts and video interviews. Susan has 30 years experience covering procurement and supply management for Purchasing magazine and Purchasing.com.

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